BSIP: 
Title: Debt Asset Feature - MPLP (Margin Position Liquidity Pool)
Author: [bench] <https://github.com/froooze>
Status: Draft
Type: Protocol
Created: 2019-08-27
Discussion: https://github.com/bitshares/bsips/issues/182

Abstract

The MPLP enables a lower maintenance collateral ratio (mcr) with mcr < MCR and mcr > 1 by borrowing extra debt asset with interest.
The liquidity pool enables the debt asset holder to earn interest through lending.
The internal maintenance collateral ratio (mcr) is changed, but not the internal collateral ratio (cr).
When extra debt asset is removed mcr = MCR again.

Motivation

No motivation to create bitAssets #189
Liquidity is eaten away by BTS shorter and not used to increase the CR of debt holder #181
Increasing CR only possible, when collateral is increased or debt is reduced
Low balance of the shorting asset by the shorter
Small price decrease triggers margin call wall and suppresses price further
Increasing MSSR does also increase premium, selling pressure and penalty

Rationale

Minimize margin calls
Increase circulating supply of debt asset, without increasing system risk

Definitions

CR = (debt - extra debt asset)/collateral(external collateral ratio)
MCR = maintenance CR or margin call CR
ICR = initial CR (amount to borrow from liquidity pool and blockchain)
cr = debt/collateral (internal collateral ratio)
mcr = internal maintenance cr = target cr (user based)
min mcr(MCR, ICR, lp1, lp3)
extra debt asset = (ICR - cr) * collateral
interest = extra debt asset * a * (1/cr)^b * interest rate
interest balance -= interest
insurance pool += interest * interest fee
interest lender = interest * (1 - interest fee)
interest balance lender += interest lender

Boundaries

Margin Position Holder

cr > 1
mcr > 1
interest balance > interest
1 > interest fee > 0

Liquidity Pool

cr ≤ 1 (t=0)
cr ≤ mcr (t>0)

Solution

The MPLP or liquidity pool reduces margin calls by lowering the mcr without adding extra BTS or decrease the debt of the position
The user has the option to increase the CR by locking the extra debt asset next to debt, without paying the current debt back

Pools

For every debt asset, there is a separated liquidity pool
Every liquidity pool has a reward pool, which collects the interest lender
Every liquidity pool has a insurance pool, which is financed by the interest fee

Timing

Every liquidity pool has a certain time threshold, which defines the max. linear removing rate by the lender
The borrower can remove extra debt asset instantly by setting mcr = MCR
The time thresholds defines, how long a borrower has to pay the interest in front

Interest

Interest rate is defined by supply/demand of (lp1+lp2+lp3)/(lp1+lp2)
Interest is paid in the debt asset. Lender can decide, if he wants to get paid in debt asset or settled debt asset (BTS)
Interest is paid from a new interest balance, which must be held in the corresponding debt asset
When integrated (Δt) Interest is as big, as the last paid interest, new interest must be paid to cover the interest for time threshold and current cr

Liquidity Pool Portion

Sub pools

lp1 is for users with mcr < MCR
lp2is for users with CR < ICR
lp3 is available debt asset

Distribution

The lp2 must be first fully filled, before mcr < MCR
The lp1 can only increase, when lp3> 0
The lp1 is distributed, to enable everyone the same min mcr
Lender removes debt asset from liquidity pool: If lp3> debt asset than Δlp3 = debt asset If lp3= 0 than Δlp1 = debt asset/time threshold (linear removed)

Margin Call Gap

ICR > MCR
The ICR must be different from MCR to increase demand in liquidity pool before margin call gets active
Every liquidity pool user increases demand from the liquidity pool until CR ≥ ICR
Margin calls happen for liquidity pool and non-liquidity pool users, when CR < MCR

Margin Calls

prioritized by cr
reduce collateral, debt, debt asset and demand for extra debt asset

Partial 1

if cr > 1 and cr < mcr
than sell collateral to reach cr ≥ mcr

Partial 2

if interest balance < interest
than mcr = MCR and sell collateral to reach CR ≥ MCR

Full

if cr ≤ 1
than sell all collateral

The full margin call does change the ownership of the collateral, extra debt asset and interest to the liquidity pool. The remaining debt/debt asset is covered by the insurance pool.

Recovery

cr = mcr

The MPLP allows during a full margin call, to get the margin position with extra funds back. The cr needs to be increased with extra collateral or debt asset to mcr. This is only possible until all collateral is sold.

System Risk

Parameters

ICR
MCR
a & b
interest fee

Insurance pool

insurance pool += (ICR - cr) * collateral * a * (1/cr)^b * interest fee * interest rate

The insurance pool covers the system risk, when:

mcr < MCR
cr < MCR
cr ≤ 1

Example

Total supply: 3 million bitUSD (100%)
Total supply in the liquidity pool: 0.6 million bitUSD (20%)
Interest rate for 14 days (= time threshold): 2%
a = 10, b = 7
interest balance = 4 bitUSD
ICR = 1.55 | MCR = 1.5

Stage 1

BTS price: 0.05 bitUSD
10k BTS as collateral
323 bitUSD debt
CR = 1.55

Stage 2

BTS price drop to 0.04 bitUSD
CR = cr = 1.24

Stage 3

65 bitUSD are needed to reach ICR again
Interest: 65 bitUSD * 10 * (1/1.24)⁷ * 2% = 2.88 bitUSD
interest balance = 1.12 bitUSD

Stage 4

The 65 bitUSD gets locked to the margin position, without paying back the 323 bitUSD debt
10k BTS as collateral
323 bitUSD debt
65 bitUSD extra asset balance
258 bitUSD overall debt
CR = 1.55

Stage 5

After 14 days the 65 bitUSD balance gets removed from extra asset balance, if the user doesn't add extra funds to interest balance. Chances to get are margin call are now high because CR gets now reduced to cr.

Conclusion

Without borrowing from the liquidity pool, the user needs to sell 1178 BTS to cover the MCR
With the liquidity pool only 2.88 bitUSD are needed, to cover the interest for CR increase to ICR

Comparison

Case	`MPLP`	`MPL`	BSIP-70
Motivation	interest rate	market fee	interest rate
Borrower	peer	blockchain	peer
Input	debt asset	BTS/every asset	every asset
Purpose	increase `CR` & `debt`	increase liquidity	lending/trading
Collateral	no	no	yes
Order book	no	no	yes

In a bear market the interest lender for the liquidity pool should be higher than BSIP-70
In a bull market the interest lender for the liquidity pool should be lower than BSIP-70

Discussion and Summary for Shareholders

The MPLP provides a free market solution to evaluate the best CR in terms of risk/reward or cost/reward based on the market liquidity. The MPLP enables a voluntary extra risk level for margin position holders, which is fully compatible to our current market mechanics. The amount of debt, which can be borrowed from blockchain and the system risk is here not increased.

Negative Feedback Loops

Proof of stake

The possibility to stake debt asset and profit from the interest, will increase supply of debt asset and demand for BTS. A lot of successful coins have staking options, which is still missing in the BitShares ecosystem.

CR and Debt increase

Because the user gets a third option to increase CR from the liquidity pool with extra asset balance, no debt needs to be paid back.

Interest Rate

The liquidity pool tries to find a fair market price for the inequity of debt asset distribution.
A higher interest rate means more inequity, which results in a higher debt asset supply for the liquidity pool.

Market Liquidity

Markets with lower liquidity have a higher value for min mcr, a, b and interest fee.

Worker Cost Reduction

Worker payments are hold in bitFIAT. The option to earn interest on bitFIAT, does reduce the worker costs and demand for BTS from the reserve pool.

Changes

Proof of stake topic added
Changed topic from settlement fund to margin position liquidity pool
Removed settlement
Added interest rate
Removed margin call fees
CR and debt increase topic added
Worker cost reduction topic added
Example topic added
Comparison topic added
Margin call gap topic added
Goals topic added
Definition topic added
Boundaries topic added
Interest balance added
internal CR = cr added
Margin call topic added
interest parameters a & b added
System risk topic added
Abstract topic added
Market liquidity topic added
Introduced ICR/MCR instead of MCR/CCR (Call CR)
Recovery topic for full margin call added

Copyright

This document is placed in the public domain.

Jul 17 '19 19:07 froooze

Another related discussion is #164 .

Jul 17 '19 20:07 abitmore

https://medium.com/aave/decentralized-lending-pool-dlp-protocol-launched-on-testnet-swap-between-fixed-and-variable-e72ae43992c

Decentralized insurance fund, which will collect a small part of the pool income to cover losses in case of liquidation issues.

Why should we not do the same?

Jul 30 '19 23:07 froooze

Hey guys, I wrote the following analysis regarding the issue. GS is only the manifestation of some more profound structural flaws in the Bitshares protocol. It's a pretty long read but, nonetheless worth the time.

Eliminating` the negative impact of Global Settlement events (GS) is certainly a priority for the Bitshares ecosystem. Currently, GS is widely regarded by the Bitshares community as a natural consequence of harsh market conditions, bad debtors and poor marketing strategy. Contrary to this perspective, I maintain here, that GS might be the consequence of some other more fundamental factors in the dynamics of the whole Bitshares protocol. I postulate that if these factors are modified, the probability of a GS or a similar event is drastically reduced almost immediately and may even tend to disappear in the long term. These factors include, but may not be limited to, two feedback loops currently present in the dynamics of workers’ financing and Margin calls. This work attempts to elucidate the architectural nature of the problem, out of which GS is only an inevitable result. Also, a new mechanism is proposed.

https://steemit.com/bitshares/@aguerrido/feedback-loops-and-analysis-of-bitshares-architecture-in-relation-to-smart-assets-sustainability

Aug 05 '19 05:08 Inmortak

@Inmortak:

First, the Settlement fund takes over the bad position, both the debt and the collateral. The choice of words here is important. The fund doesn’t buy the position, it takes over it. The former holder doesn’t own the position any more, nor he has any debt to pay. Also, the position doesn’t disappear, it still exist with a new owner:

We don't need extra funds to take over positions, partial GS could do this also
We need funds to reduce bad debt, what you did not intended
I would call this swap and not settlement
What happens with the positions, when BTS price falls further and CR goes under 1?
The margin call has also a negative feedback loop you missed:

demand for BTS increases, because you need more BTS to cover the margin position
buying side has more power with lower price

Aug 06 '19 10:08 froooze

1. We don't need extra funds to take over positions, partial GS could do this also

Hey Froooze!

Where can I get the details of how partial GS would work?

2. We need funds to reduce bad debt, what you did not intended

Why is that? If the system just takes over positions before the fall under CR < 1, what extra funds would be needed?

4. What happens with the positions, when BTS price falls further and CR goes under 1?

Read my complete analysis here. I also consider that case.

5. The margin call has also a negative feedback loop you missed:


* demand for BTS increases, because you need more BTS to cover the margin position

* buying side has more power with lower price

Yep, that's another feedback. But, it is conducted by the debtors under margin call, the feedbacks I consider are conducted by the workers and the debtors. Under the current protocol the debtors, both have their collateral of their position put on sale (first feedback) and have to buy more collateral (another feedback). They appear in both feedbacks, although not with the same force.

Aug 06 '19 18:08 Inmortak

As promised on bitsharestalk, here are my quick comments/questions.

I'm afraid the BSIP is written too ambiguously for me to be completely sure what its author intended.

As far as I can tell, the pool seems to be trying to do a lot of things, which makes it very difficult to determine whether those things are likely to have the intended effects. You describe several different ways money gets into the pool, and several different ways money leaves the pool, but none of these mechanisms are clear.

Here are some questions I had after trying to understand the BSIP:

Does the pool buy low-CR positions, or are low-CR positions confiscated and put into the pool? If the latter, how does your mechanism ensure that there is enough collateral for the the smartcoin?

What is the mechanism for the BTS buyback? A market order?

What is the staking mechanism? Are you implying that people will lend money to the pool at interest?

Have you worked out a flow chart for this? I think seeing a graphical picture of the whole system you're proposing would help tremendously.

Aug 14 '19 23:08 biophil

@biophil: Thank you for your feedback!

Does the pool buy low-CR positions, or are low-CR positions confiscated and put into the pool? If the latter, how does your mechanism ensure that there is enough collateral for the the smartcoin?

The debt asset is used to buy BTS from margin positions, which have a CR of settlement ratio or lower.

What is the mechanism for the BTS buyback? A market order?

Settlement

What is the staking mechanism? Are you implying that people will lend money to the pool at interest?

There is no interest rate only speculation to buy cheap BTS or enable everyone to borrow at lower CR.

Have you worked out a flow chart for this? I think seeing a graphical picture of the whole system you're proposing would help tremendously.

I try to add a flow chart.

Aug 15 '19 13:08 froooze

@froooze

Source of funds in the liquidity pool: There is an aspect of the proposal which I think is vague: where do the funds from the liquidity pool come from? My reading of the "Proof of stake" section suggests that any holders of a smartcoin (e.g. holders of bitUSD) can deposit some amount of their smartcoin into the liquidity pool. Is this correct?
Which liquidity pools?: Can the target asset be anything besides BTS? Which liquidity pair pools will exist? Who can determine which liquidity-pair pools will exist?
Asset type of compensation to depositors: Depositors are incentivized to do so because they will be compensated in some way. Will the compensation be in terms of the "target asset" of the liquidity pool (e.g. BTS?)
Compensation Amount: Will compensation be determine based on some of the interest ideas from the Decentralized Lending Pool article? Therefore the interest payment is variable and depends both on the supply provided by the depositors, and the demand of the "bad debt". If there is no bad debt, then interest will be zero?
Withdrawals: Can a deposit be withdrawn?
- If so, when can I withdraw bitUSD?
- If so, can the withdrawal be in terms of the original deposit asset, or only in terms of the target asset? In other words, If I deposit 100 bitUSD into a "bitUSD for BTS Liquidity-pair pool", can I ever withdraw any bitUSD?
- Is there a concern that a "successful" liquidity pool may consume all of the deposits? How will depositors be compensated?

Aug 27 '19 15:08 MichelSantos

What is the staking mechanism? Are you implying that people will lend money to the pool at interest?

There is no interest rate only speculation to buy cheap BTS or enable everyone to borrow at lower CR.

@froooze About "enable everyone to borrow at lower CR.": how does borrowing at lower CR happen? Is this a part of the proposal?

Or is the idea that after a depositor gets cheap BTS they might optionally use that compensation to borrow more of the debt asset from their own account?

Aug 27 '19 15:08 MichelSantos

@MichelSantos

where do the funds from the liquidity pool come from? My reading of the "Proof of stake" section suggests that any holders of a smartcoin (e.g. holders of bitUSD) can deposit some amount of their smartcoin into the liquidity pool. Is this correct?

This is correct every asset, which can be borrowed has a liquidity pool.

* _Which liquidity pools?_: Can the target asset be anything besides BTS?  Which liquidity pair pools will exist?  Who can determine which liquidity-pair pools will exist?

There exists no pair, because you can't trade the debt asset from the liquidity pool. Only locking up next to your debt position is possible to increase the CR.

* _Asset type of compensation to depositors_: Depositors are incentivized to do so because they will be compensated in some way.  Will the compensation be in terms of the "target asset" of the liquidity pool (e.g. BTS?)

The liquidity pool holds only debt assets no BTS. Compensation could be in the specific debt asset or in settled debt asset (BTS).

* _Compensation Amount_: Will compensation be determine based on some of the interest ideas from the [Decentralized Lending Pool article](https://medium.com/aave/decentralized-lending-pool-dlp-protocol-launched-on-testnet-swap-between-fixed-and-variable-e72ae43992c)?  Therefore the interest payment is variable and depends both on the supply provided by the depositors, and the demand of the "bad debt".  If there is no bad debt, then interest will be zero?

This is right, but when there is no demand to cover bad debt, like in an uptrend the requirements to borrow extra debt from the pool, can be lowered. Or you get a higher interest rate for #189?

* _Withdrawals_: Can a deposit be withdrawn?

Yes the deposit can be withdrawn after a certain time from the pool. The withdraw is linear and limited by the size of the whole pool.

  * If so, can the withdrawal be in terms of the original deposit asset, or only in terms of the target asset?  In other words, If I deposit 100 bitUSD into a "bitUSD for BTS Liquidity-pair pool", can I ever withdraw any bitUSD?

After you have withdrawn the 100 bitUSD from the pool, the interest rate for the whole pool will rise.

  * Is there a concern that a "successful" liquidity pool may consume all of the deposits?  How will depositors be compensated?

The lender gets compensated by the borrower with the interest rate of the liquidity pool.

Aug 27 '19 17:08 froooze

@froooze About "enable everyone to borrow at lower CR.": how does borrowing at lower CR happen? Is this a part of the proposal?

This is part of the old design (settlement fund) and needed a rewrite, because of these flaws:

settlement
no interest rate
fees on margin calls

Aug 27 '19 17:08 froooze

* _Which liquidity pools?_: Can the target asset be anything besides BTS?  Which liquidity pair pools will exist?  Who can determine which liquidity-pair pools will exist?
There exists no pair, because you can't trade the debt asset from the liquidity pool. Only locking up next to your debt position is possible to increase the CR.

I'm afraid that I'm missing several fundamental ideas so I hope that you don't mind multiple questions.

The CR of "what"? Who owns the "what"? Is it owned collectively, or do different people own portions of the "what"? Is it the lender, borrower, or someone else who own the "what"?

How is CR defined? Is the CR the collateral ratio of all the different debt positions for that asset?

Whose debt position? The lender, the borrower, a third party? Does this debt position exist separate from this liquidity pool? Or does it only exist when this liquidity pool is used?

When someone borrows from the liquidity pool: what are they permitted to do with what they have borrowed?

How does having a liquidity pool change the CR? Is the liquidity pool being used by a blockchain algorithm to purchase margin calls?

* _Asset type of compensation to depositors_: Depositors are incentivized to do so because they will be compensated in some way.  Will the compensation be in terms of the "target asset" of the liquidity pool (e.g. BTS?)
The liquidity pool holds only debt assets no BTS. Compensation could be in the specific debt asset or in settled debt asset (BTS).

Who decides what the compensation will be paid in? Is it an algorithm in the blockchain logic that decides?

Aug 28 '19 22:08 MichelSantos

The CR of "what"? Who owns the "what"? Is it owned collectively, or do different people own portions of the "what"? Is it the lender, borrower, or someone else who own the "what"?

CR is always tided to a margin position of one debt asset and user. (old)

How is CR defined?

https://how.bitshares.works/en/master/bts_holders/dex_margin_mechanics.html#how-is-the-collateral-ratio-cr-calculated

Is the CR the collateral ratio of all the different debt positions for that asset?

No (old)

Whose debt position? The lender, the borrower, a third party?

It is the debt/margin position, which is created by the borrower. (old)

Does this debt position exist separate from this liquidity pool?

Yes (old)

Or does it only exist when this liquidity pool is used?

It is independent from liquidity pool. (old)

When someone borrows from the liquidity pool: what are they permitted to do with what they have borrowed?

They can increase the CR of their margin position, without paying back the debt in the margin position, by locking separately the debt asset in extra asset balance to the margin position. (new)

How does having a liquidity pool change the CR? Is the liquidity pool being used by a blockchain algorithm to purchase margin calls?

No, the liquidity pool provides the option to borrow the debt asset back to increase the CR without selling collateral or reducing the debt of the margin position. (new)

Who decides what the compensation will be paid in? Is it an algorithm in the blockchain logic that decides?

The lender, who provides the debt asset to the liquidity pool decides, if he wants to be paid in the debt asset or in settled debt asset (BTS).

I'm afraid that I'm missing several fundamental ideas so I hope that you don't mind multiple questions.

The whole liquidity pool doesn't touch the current margin position system. It unites the two parties BTS/debt holder and debt asset holder with the liquidity pool and interest rate for the debt asset lender.

Aug 29 '19 00:08 froooze

I could support this

(Sapiens)

Aug 30 '19 22:08 Inmortak

@froooze Thank you for the helpful explanations. To help our discussion further, I'd like to define the following parties:

Blockchain
Account Alice: The blockchain lent 333 bitUSD to Alice in exchange for 10k BTS as collateral (i.e. Alice shorted the 333 bitUSD into existence). This collateral is held by the blockchain until the 333 bitUSD is returned by closing the debt or through force settlement)
Account Bob: Alice then sold the 333 bitUSD to Bob
Account Charlie: Charlie lent 67 bitUSD to the liquidity pool

There are effectively three loans involved with your example:

Original MPA loan: The blockchain lent 333 bitUSD to Alice Funding of Liquidity Pool: Charlie lent 67 bitUSD to the liquidity pool Borrowing from liquidity pool: Liquidity pool lent 67 bitUSD to Alice

This is before any discussion of the CR.

Do we agree on this description?

Stage 5

The 67 bitUSD gets locked to the margin position, without paying back the 333 bitUSD debt

9.992k BTS as collateral

333 bitUSD debt

67 bitUSD extra asset balance

267 bitUSD overall debt

CR = 1.5

With your example, the CR increases from 1.2 in Stage 2 to 1.5 in Steg 5. This occurs in your example not because the collateral has increased but because the debt owed by Alice to the blockchain has effectively decreased from 333 bitUSD to 267 bitUSD.

For this to be true means that the blockchain must have the option to confiscate that 67 bitUSD to satisfy potential force settlements that require closing Alice's debt by the blockchain.

Do we agree on this point?

Consequently if the 67 bitUSD is confiscated by the blockchain, how can the liquidity pool pay back Charlie?

Stage 4

Interest for the 66 bitUSD: 0.33 bitUSD

Margin call for the interest: 8 BTS

Margin callling some of the collateral to pay interest results in less collateral which results in a lower CR.

Do we agree on this point?

With enough interest payments, Alice's debt to the blockchain will have less and less collateral. An extreme case could be:

Collateral: 0 BTS Original debt: 333 bitUSD Extra asset balance: 333 bitUSD Overall debt owed by Alice to the blockchain: 0 bitUSD

Overall debt owed by Alice to the liquidity pool: 333 bitUSD Overall debt owed by liquidity pool to Charlie: 333 bitUSD

Do we agree on this description?

Sep 02 '19 15:09 MichelSantos

@MichelSantos:

Consequently` if the 67 bitUSD is confiscated by the blockchain, how can the liquidity pool pay back Charlie?

the percentage of the borrowed part does increase in the liquidity pool, by removing the non borrowed part of the liquidity pool
the interest rate for the liquidity pool does rise
every borrower will get less debt asset in the next round, when increased interest rate could not increase the supply of the liquidity pool

I do agree on all your examples
Paying the interest from the margin position is possible, but has its limitations, because system risk is increased
Paying the interest from an external source is more sustainable
The margin position needs always CR > 1 without the extra debt asset, to be able to remove the extra debt asset, when interest is not paid to the reward pool anymore

Sep 03 '19 00:09 froooze

The margin position needs always CR > 1 without the extra debt asset,

But doesn't that requirement make the whole concept moot? When you talk about "lowering the CR" you talk about the CR with the extra debt asset, but the CR that must be maintained in margin calls and settlements is the CR without it. Which means the effective CR is always the same as it would be without the liquidity pool. Or did I miss something?

Sep 03 '19 05:09 pmconrad

But doesn't that requirement make the whole concept moot?

No, because user can now trade with a lower internal collateral ration (cr) ≥ 1, without increasing the system risk.

Sep 03 '19 11:09 froooze

Consequently` if the 67 bitUSD is confiscated by the blockchain, how can the liquidity pool pay back Charlie?
* the percentage of the borrowed part does increase in the `liquidity pool`, by removing the non borrowed part of the `liquidity pool`

I did not understand this comment. May I ask you to re-express it, please?

1. I do agree on all your examples

Thank you for confirming

2. Paying the interest from the margin position is possible, but has its limitations, because system risk is increased

3. Paying the interest from an external source is more sustainable

I agree with both of these points. I actually think that it might be necessary to use external source to pay the interest because, as I see MPA loans, the original collateral truly belongs to the blockchain until either (a) the original debt (bitUSD) is closed by the original MPA borrower or (b) the current holder of the bitUSD redeems the bitUSD for the underlying collateral.

I can write up my understanding, if you think it will help our discussions, of how the assets and liabilities of the blockchain, Alice, Charlie, and the liquidity pool are changing during these different moments in time.

Sep 04 '19 23:09 MichelSantos

No, because user can now trade with a lower internal collateral ration (cr) ≥ 1 without increasing the system risk.

This might be central to my difference in understanding.

Could you define the internal CR and external CR? And for both CRs, who do you consider to own the collateral (whose asset is it)? And who do you think is the legitimate controller of it (who is authorized to transfer ownership of it)?

If you will indulge me, I will describe how I see the collateral when an account borrows a regular smart coin from the blockchain (and let us ignore the proposed liquidity pool). The collateral that is provided by a smart coin borrower is an asset that belongs to the borrower; but the collateral is escrowed with the blockchain and is encumbered. The borrower may not withdraw the encumbered collateral (below the amount that satisfies the MCR) until the borrower pays it back the loan. However, the blockchain may confiscate it if the holder of the smart coin redeems (force settles) the debt to obtain the underlying collateral. In summary the collateral is an encumbered asset of the borrower. And it is controlled by the blockchain while the debt is outstanding.

Sep 04 '19 23:09 MichelSantos

Consequently` if the 67 bitUSD is confiscated by the blockchain, how can the liquidity pool pay back Charlie?

Charlie needs to wait time threshold, before he can remove the bitUSD. During the time threshold every new contract for a borrower gets less bitUSD addressed and interest rates rises also for every new lender.

Paying the interest from an external source is more sustainable

I introduced for this interest balance, which needs to be filled with debt asset

I can write up my understanding, if you think it will help our discussions, of how the assets and liabilities of the blockchain, Alice, Charlie, and the liquidity pool are changing during these different moments in time.

The blockchain holds always the bitUSD, until Alice or Charlie decides to remove the extra debt asset from the margin position or liquidity pool

Could you define the internal CR and external CR?

Yes, I did now above.

And for both CRs, who do you consider to own the collateral (whose asset is it)?

Collateral and extra debt asset is owned by blockchain

And who do you think is the legitimate controller of it (who is authorized to transfer ownership of it)?

The extra debt asset can immediately be removed from margin position by transferring to the liquidity pool, but needs time threshold to be available in the user account of the lender.

And it is controlled by the blockchain while the debt is outstanding.

The right system of the liquidity pool, is only controlled by parameters and blockchain.

Sep 05 '19 01:09 froooze

No, because user can now trade with a lower internal collateral ration (cr) ≥ 1 without increasing the system risk.

IMO the trades of the user do not affect the system risk anyway.
IMO the system risk is increased if you take into account the fact that the extra_debt_asset (plus interest!) has to be paid back at some point.
The risk of an individual user's position varies, e. g. depending on ccr. This is not reflected in the interest rate the user has to pay. IMO this is an invitation for abuse.
Selling all collateral in a full margin call is a bad idea IMO because a large dump will crash the price, with the result that only a small fraction of the debt will be recovered from the market. The extra_debt_asset may not be sufficient to cover the gap.

Sep 05 '19 06:09 pmconrad

* IMO the trades of the user do not affect the system risk anyway.

System risk is covered through reserve pool

* IMO the system risk is increased if you take into account the fact that the `extra_debt_asset` (plus interest!) has to be paid back at some point.

extra_debt_asset has to be never paid back, unless the borrower violates the boundaries or a higher interest rate reduces the supply of the liquidity pool.

* The risk of an individual user's position varies, e. g. depending on ccr. This is not reflected in the interest rate the user has to pay. IMO this is an invitation for abuse.

Wrong: interest = extra debt asset * (a * 1/cr + b * (1/cr)² + c * (1/cr)³ ) * interest rate

* Selling all collateral in a full margin call is a bad idea IMO because a large dump will crash the price, with the result that only a small fraction of the debt will be recovered from the market.

Wrong:

The dump is only one account and not the whole market as price drops
A user, who already has paid interest to maintain cr of 1, has a higher interest to increase collateral and not loose the whole margin position
The margin position has with the extra debt asset next to the collateral a higher CR after price crashes, than the equivalent position only backed BTS.

Sep 05 '19 11:09 froooze

Wrong: interest = extra debt asset * (a * 1/cr + b * (1/cr)² ) * interest rate

You just made that up, didn't you? I'm sure that line read differently yesterday. So I wasn't wrong.

The dump is only one account and not the whole market as price drops

So? One large debt position that is resolved can easily crash the internal market. Note that this happens when cr < 1, i. e. selling the collateral will definitely not recover the full debt.

A user, who already has paid interest to maintain cr of 1, has a higher interest to increase collateral and not loose the whole margin position

I don't think so. He has paid the interest and it's gone. To a rational investor, the situation is the same as before.

Sep 06 '19 06:09 pmconrad

You just made that up, didn't you? I'm sure that line read differently yesterday. So I wasn't wrong.

Yes and no. I original posted the basic equation with, before you answered.

So? One large debt position that is resolved can easily crash the internal market.

No debt position does crash the market, people with liquid BTS crash the market. Margin positions suppress the market, after price has crashed, but it is not the reason for price movement.

Note that this happens when cr < 1, i. e. selling the collateral will definitely not recover the full debt.

Because of this risk there is a reserve pool mainly financed by interest from positions whit low cr, to cover these risks.

I don't think so. He has paid the interest and it's gone. To a rational investor, the situation is the same as before.

When he is gone, his margin position gets called and removed from blockchain.

Sep 06 '19 10:09 froooze

I really appreciate your great efforts @froooze

I believe solving this issue is very important for the future of BitShares.

Sep 06 '19 11:09 ioBanker

No debt position does crash the market, people with liquid BTS crash the market.

Right now the 10 least collateralized positions on CNY have a total collateral of more than 2M BTS and a CR of less than 1.61. If these 2M were sold on the internal market as proposed here, the price (CNY/BTS) would instantly jump 10% down. This also means that you'd end up with perhaps only 95% of the debt covered.

And CNY is our most liquid market. On an illiquid market the situation could be catastrophic in the sense that the whole collateral is sold for 1 satoshi of debt.

Sep 06 '19 13:09 pmconrad

If these 2M were sold on the internal market as proposed here, the price (CNY/BTS) would instantly jump 10% down.

This was only the case when MSSR was 1.1, but with 1.01, this is not valid anymore. Margin calls suppress price and removes liquidity, but no margin call does decrease price by itself.

This also means that you'd end up with perhaps only 95% of the debt covered.

People who wanna borrow extra debt asset need to cover MCR and not CCR
Ending up with less is not a problem, when reserve pool covers the losses
Because interest is paid in debt asset for reserve pool, price drop of collateral is less a problem

And CNY is our most liquid market. On an illiquid market the situation could be catastrophic in the sense that the whole collateral is sold for 1 satoshi of debt.

Bad liquidity is the biggest problem on the bitAssets markets and the liquidity pool does increase liquidity
Markets with higher system risk, because of low liquidity have also other parameters for MCR, CCR, interest fee, a and b

Sep 06 '19 15:09 froooze

This was only the case when MSSR was 1.1, but with 1.01, this is not valid anymore. Margin calls suppress price and removes liquidity, but no margin call does decrease price by itself.

I'm talking about margin calls as per OP:

if cr ≤ 1 than sell all collateral and remove extra debt asset

Selling all collateral into the market will crash the price, like any other big sell order will. This has nothing to do with MSSR. By selling a large amount you'll end up with an average price much worse than current market price, in other words you recover much less debt than you'd think when looking at the current market price.

Ending up with less is not a problem, when reserve pool covers the losses

I doubt that the pool will be able to cover all losses.

Bad liquidity is the biggest problem on the bitAssets markets and the liquidity pool does increase liquidity

The pool does not increase liquidity by itself. It provides a certain incentive for traders to increase liquidity, but incentives do not always work (as we have learned in the past, otherwise we wouldn't be talking about this).

Sep 07 '19 08:09 pmconrad

Selling all collateral into the market will crash the price, like any other big sell order will. This has nothing to do with MSSR. By selling a large amount you'll end up with an average price much worse than current market price, in other words you recover much less debt than you'd think when looking at the current market price.

Only the collateral from one position gets sold at once
Selling collateral as a maker does suppress the price, but does not decrease price
Selling collateral as a taker does decrease price (which is not the case here)
MSSR is an important part here
Because you can set ccr = 1.01, doesn't mean you should do this, because after a small price drop you loose your collateral, the paid interest and extra debt asset

I doubt that the pool will be able to cover all losses.

This has nothing to do with doubt, but with the right parameters for the liquidity pool and how insurance works. The current insurance (collateral) is 100% dependent on the collateral price. The reserve pool insurance is 100% independent from the collateral price.

The pool does not increase liquidity by itself. It provides a certain incentive for traders to increase liquidity, but incentives do not always work (as we have learned in the past, otherwise we wouldn't be talking about this).

It does by allowing margin positions with less collateral and creating a motivation (interest) to borrow debt asset for the liquidity pool, without extra risks/tasks (trading) for the extra debt asset lender.

Sep 07 '19 11:09 froooze

New BSIP: Debt Asset Feature - MPLP (Margin Position Liquidity Pool)

Abstract

Motivation

Rationale

Definitions

Boundaries

Margin Position Holder

Liquidity Pool

Solution

Pools

Timing

Interest

Liquidity Pool Portion

Sub pools

Distribution

Margin Call Gap

Margin Calls

Partial 1

Partial 2

Full

Recovery

System Risk

Parameters

Insurance pool

Example

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

Conclusion

Comparison

Discussion and Summary for Shareholders

Negative Feedback Loops

Proof of stake

CR and Debt increase

Interest Rate

Market Liquidity

Worker Cost Reduction

See also

Changes

Copyright

Stage 5

Stage 4